Overview of the results of the Japan-U.S. Entrepreneurial Forum

February 2003
Ministry of Economy, Trade, and Industry, Japan
Department of Commerce, U.S.A.

The Japan-U.S. Entrepreneurial Forum: Economic Revitalization Through Entrepreneurship was held on February 12 in Tokyo and on February 14 in Kyoto. It was hosted by the Americas Division of the Ministry of Economy, Trade, and Industry; the U.S. Department of Commerce; the Research Institute of Economy, Trade, and Industry; the Japan External Trade Organization, and sponsored by the Japan Federation of Economic Organizations (Keidanren); the Kyoto Research Park Co., Ltd.; and the American Chamber of Commerce in Japan.

The Forum was held under an agreement as a result of discussions between METI Minister Takeo Hiranuma and U.S. Commerce Secretary Don Evans. The Forum was brought to fruition through the cooperation initiative for furthering close economic ties between Japan and the United States.

With the Japanese economy in recession, expectations are mounting for new corporations, particularly start-ups, to become centers for absorbing unemployment and to serve as seeds for a new industry to support future Japanese economic growth. The Forum provided a site for Japanese and American entrepreneurs and people affiliated with government, capital, and academia, to gather for discussions. The objectives were to promote further exchanges between Japan and the United States in this sector, and to obtain suggestions and find opportunities for reforming current situation in Japan regarding the launch of new companies.

After opening remarks by representatives from both Japan and the United States, participants divided into two subcommittees, where two panel discussions were conducted (Panel sessions: (i) Entrepreneurial Training, (ii) Role of Innovation, (iii) Capital Formation, (iv) Legal/Regulatory and Physical Infrastructure). There were a total of 156 participants in Tokyo and 184 participants in Kyoto. While the discussions were short, there was interaction among the panelists, chair and audience. An overview follows.

1. Opening Remarks

• The Japanese business start-up rate is lower than the business closure rate, and has had a downward trend over the long term. Data for 1999 shows a start-up rate of 4.1% and a closure rate of 5.9%. The factors behind the difficulty in starting new businesses have been: (1) difficulty in fund procurement, (2) difficulty in marketing with both the client and the supplier, and (3) difficulty with personnel and managing capabilities.
  
  
• The climate and infrastructure in Japan for launching businesses lags that of the United States and Great Britain. About 80% of start-up funds are accounted for by entrepreneurs' funds. About 30% of the funds are borrowed from private-sector sources. The percentage of people receiving capital from venture capital sources does not even reach 1%. Also, Japan requires six times the amount of procedures for starting a new company than does the United States and Great Britain, as well as three times the amount of time. And from eight to ten times the amount of financial outlay (OECD study).
  
  
• The United States has an outstanding culture in terms of the infrastructure and the climate for new business start-ups. In December 2001, Deputy Secretary of Commerce Bodman said that despite the collapse of the dot-com bubble, the success of dot-com companies was the result of the development of information technology and Research and Development (R&D) by many companies which failed or went bankrupt and that in the United States, people had the spirit to begin their careers anew even when they failed in business.
  
  
• The American economy has overcome the stagnation and downturns of the 1980s, and has been vigorously rebuilding since the 1990s. At the backdrop of that rebuilding is the indispensable presence of various IT venture companies, such as those in Silicon Valley, and the venture capitalists that support their growth.
  
  
• Since the collapse of the bubble economy in Japan, the country is said to have lost 10 years. It is not the case, however, that the past 10 years have been a total waste. Despite the economic downturn, there has been an increase in the number of people who are making aggressive and bold new attempts to start businesses, and there are some of those people present at this forum. There has also been a significant change in the attitude toward the brands of large companies and the lifetime employment system. This 10-year period was an essential period for recharging batteries and learning such that a new, dynamic Japanese economy and society could form and emerge.

• The global economy faces many challenges and strains. The struggle for growth is crucial as we not only lead the industrialized world but also strive to aid the developing and least developed nations.
  
  
• Entrepreneurship is the key to economic recovery. The requirements for sustainable development are the innovation and productivity improvements that result from competitive and growing enterprises. Entrepreneurship creates new jobs. Data collected over the past twenty years shows that small entrepreneurial companies create two-thirds of all new jobs, are responsible for more than two-thirds of innovation in the economy, and account for two-thirds of the differences in economic growth rates among industrialized nations. In Japan, we face the lowest amount of entrepreneurial activity of any industrialized and many developing states. Studies estimate the amount of entrepreneurs in the Japanese economy at 2-3%. Only 0.6% of Japanese women are engaged in entrepreneurial activity.
  
  
• For both of our countries, government intervention in the marketplace has been counterproductive. True innovation comes from the private sector. What governments can do, should do, and must do is foster the climate where entrepreneurs can flourish.
  
  
• In business, money always matters. The average start-up cost for people launching businesses in the United States is less than US$10,000. The people starting businesses borrow the money from their family and friends. In such cases, angels or a network of angels do not help these people, even in the United States. This should be changed.
  
  
• People must be free to fail and able to shed the stigma of failure in business. Fears over this are relatively strong in Japan. Properly functioning capital markets, able and willing to absorb this risk, will lead to more people engaging in innovative behavior.
  
  
• Other factors that impact the level of entrepreneurism are cultural. It is the goal of young people in Japan to be employed at a large corporation. In the United States, the aspiration in business schools is not to work for Microsoft, but to start the next Microsoft. Today, we must teach the leaders of tomorrow the importance of entrepreneurship. Entrepreneurs look for self-expression and freedom.
  

2. Track I

(Panel: Entrepreneurial training)

• Training in case studies is important. Large companies in Japan are filled with talented people. There has been little change in the employment trend at large corporations for 30 years. If we look over the next 20 years, the important topic of discussion will be school education; if we look over the next 10 years, the important topic of discussion will be in-house training at corporations.
  
  
• Talented personnel become part of management, rather than become involved in problems such as those at a sales subsidiary. It is necessary to become involved with real difficulties. When there are many project teams for creating products, such as i-mode, the Prius, or cellular phone with a camera, and cash flow is borne, the project should be carried out at the company if it becomes a core business and other businesses are spun off.
  
  
• It would be a good idea for universities to collaborate with small-medium sized companies or with new startups, or to promote business plan competitions as a way of dealing with real difficulties. Promoting a competitive society within the university also should be encouraged.
  
  
• The restructuring of large corporations should be clarified. About 20% of the employees might well be very talented people.
  
  
• Education is also important in the long term. Japan has just set out to provide education in primary and secondary schools about starting a business. Americans start training in self-expression even earlier, in kindergarten. Also, Japan has yet to form intelligent clusters centered on universities. This is something to do in the future.
  
  
• The past 20 to 30 years have been a period of catch-up for Japan, and there was no real need for venture capital-funded companies dealing with technology. Recently however, there has been a swarm of venture capital-backed startups. People with the incentive for R&D and real ability emerged in a short time, as some of the elite with links to large corporations spun off these companies with ties to large corporations as equals. Thus, some individuals have begun to go independent.
  
  
• Some large corporations now think that they will not grow unless they foster venture capital-backed start-ups.
  
  
• Entrepreneurial training is emerging in primary and secondary schools. A certain kind of character is necessary to become an entrepreneur, but many things can be taught and learned at school. Entrepreneurial training needs education that fosters an autonomous individual.
  
  
• Society and families will oppose business start-ups. Educating entrepreneurs requires both the education of society and the education of parents--not just the education of students. It will be necessary to change the climate and the sense of value of society.
  
  
• It would be excellent if the activities of academic societies on venture capital, community businesses, and NPOs could change the climate of society.
  
  
• In Japan, there seems to be a policy of not allowing children in school to handle money. They should be preferably taught about making money in primary and secondary school.
  
  
• Entrepreneurs can be made. New business start-ups require talent, opportunity, capital, and know-how. All these can be learned at the university. Interpersonal networks are also important. These also can be found at the university. It is important to bring in people with various abilities, including those who are well versed in management and those who are well versed in operations.
  
  
• Exchange between different cultures is successful where people work together as equals.Famous entrepreneurs are role models. If one has the strong will to take that path, one will overcome all obstacles and succeed.
  
  
• In the United States, people learn to deal with risk at an early age (at small clubs in kindergarten, etc.). They learn to recover from failure as they succeed and fail.
  
  
• It is necessary to receive education in entrepreneurship as early in life as possible. Close connections between industry and academia are also important, and students should work. It is important to start entrepreneurship courses, with business plan competitions and joint classes with a school of management.
  
  
• IT and biotechnology have potential for the future.Ideas are needed to start up businesses. Ideas can't be taught, but people can learn techniques for forming ideas in the university.
  
  
• University is a place for meeting people with knowledge.
  
  
• Japan and the United States share the awareness that starting businesses is the engine of the economy.
  
  
• Awareness is growing that universities and corporations are the infrastructure for entrepreneurs, but the infrastructure has yet to be developed. It is important to have role models.

(Panel: The role of innovation)

• There has been a policy in recent years to promote industry-university linkage. Laws have been formulated and the General Science and Technology Council has been established as a governmental organization to coordinate the issues which overlap both the Ministry of Economy, Trade and Industry and the Ministry of Education, Culture, Sports, Science and Technology.
  
  
• Linkage between industry and university had been focused on large projects. They are changing now to links between industry and small-medium sized companies for contributions to the community.
  
  
• For a long time, the digital still camera was not profitable. People continued R&D, however, because they believed that the product's time would eventually come. Finally, it did and it developed a large market.
  
  
• It is important to have the management skill to modularize solutions for complex R&D activities and invest resources into R&D from a long-term perspective.
  
  
• As with the program for corporate tie-ups (IIAP: IMEC Industrial Affiliation Program) conducted at IMEC*, it is possible through collaboration to speed up development, cut costs, and reduce development risks.
  
  * IMEC is the largest independent research center in Europe. It conducts wide-ranging research, in such fields as the devices and designs for macro-electronics and information technology.
  
  
• Technology based on nano-technology and other science becomes important. In scientific fields, corporate R&D in Japan is behind that of the United States (as compared to engineering field).
  
  
• For the sake of argument, raising the start-up rate will also raise the failure rate. A start-up rate of 20% will translate into a failure rate of 20%. We must think about whether we want that kind of society. We also must consider whether a society of individualism is good or not, and whether we want to basically change and become a society surrounded with many people greedily seeking money.
  
  
• The ideal would be a society in which large corporations indirectly foster venture capital start-ups. Large corporations should eliminate the creed of independence and take an active role in purchasing and introducing venture capital firms and technology.
  
  
• Japan should not adopt the American approach as it is. A point for debate is how to develop an environment for creating venture-capital firms that can be overlaid on the Japanese experience.
  
  
• There are various arguments whether venture capital spurs the start of new businesses, but the data indicates that venture capital has a strong and positive impact on R&D. It is a key factor powering U.S economic growth. Also, the sales and federal tax payments of companies backed with venture capital are 2-3 times higher than those for non-venture backed companies.
  
  
• Relationship between industry and university takes the form of sponsored research, collaborative research and consortia. Universities can conduct the basic research that is difficult for a company to handle. This has the mutual benefit of furthering student understanding of real issues.
  
  
• Small-medium sized businesses support technical innovation, and large companies and governments provide funds to small- medium sized businesses.
  
  
• Most of the items the United States exports are manufactured by small-medium sized corporations. There is an environment in which these small- medium sized corporations can flourish.
  
  
• The problem is the environment for starting companies. Although there is a focus on education, I was taught nothing at school about starting a company, but I was able to go to the United States and start one.
  
  
• The Japanese media dislikes venture capital firms, and they find it difficult to praise success. There are few entrepreneurs in Japan. The key is to increase their number and create an environment in which it is easy for small- medium sized corporations to do business.
  
  
• Many large companies in Japan hold patents which are not utilized. Ways to resolve this problem are to create independent business units that can utilize these undeveloped patents, or to provide some of the patents to their affiliated companies.
  
  
• The government has an important role as a client or as a mentor in the SBIR program**.Incentive is important. Business role models such as Gates and Ellison are important. If one has the strong will to achieve one's dream, the money will surely follow.
  
  ** This is a system in which government agencies with funds to contract R&D assume the obligation to distribute a certain percentage to small- medium sized businesses.
  
  
• It would probably be difficult for Japan to adopt American methods without modification.It is important to utilize small- medium sized corporations in business. It is not a question of companies being either big or small.
  
  
• It is easy to protect intellectual property in the Unites States for the first year. During that year, companies will consider whether to obtain a patent, and apply for a patent for only those items that may actually be profitable.
  
  
• The role of innovation is broad, and hard to summarize. The patterns of success are diverse and by no means simple, but there is much to be learned from the United States. For connections between industry and academia, the efforts of George Mason University can be a reference.
  
  
• Large corporations in Japan are an exception from an international perspective. They have overcome difficulties while transforming themselves. Large corporations in the United States were in the ascendant from the '50s to the '70s. There was a structural change following that which lasted more than 10 years. It will take time for Japan to achieve this structural change, but it is important that we start from the places where changes can be made.

2. Track II

(Panel: Capital formation)

• Rather than making a profit, angel investors emphasize the personal relationship with the entrepreneur. Theirs is a long-term investment, so it is possible to make flexible investments in accordance with their sense of value.
  
  
• Angels have a tendency to invest in the industry in which they ran a business. They can have a better grasp of the soundness of an idea if it is for the same industry. Angels who formerly ran businesses are inclined to discover young entrepreneurs and foster their development. There is a tendency to invest in companies related to the field in which one was previously involved.
  
  
• Investments by institutional investors and venture capitalists in fields outside of IT such as in the retail and biomedical sectors account for a relatively small amount of the whole--about 20%. Investments from angels play a major role in such high-risk fields.
  
  
• It would be helpful for Japan if there were a Japanese model. Either a small group, joint stock, or limited partnership would be fine. Angels play a legal role, and create a model for human networking. They call on other angels or venture capitalists to make a joint investment. It is important that investments be made.
  
  
• While being an entrepreneur requires several personality traits, the most important is learning from failure. Failures must not be punished.
  
  
• Focused advice is given to entrepreneurs. If the initial opening is too wide, failure will result. Widening the opportunity is better after success. While the involvement of technology from universities to national research institutes is important, innovation is often stifled because of the involvement of people with an interest in the operation.
  
  
• Venture capitalists and angels should not waste the entrepreneur's time. Money is required for the start-up.
  
  
• During the 1980s, it was recognized that the rights for inventions were to be held by the research institution or the trustee institution that received federal funding under the Stevenson-Wydler Technology Innovation Act and the Bayh-Dole Act in 1980. Universities were encouraged to give a license for their inventions to corporations. Therefore, the provisions of this law greatly contributed to the later emergence of entrepreneurs related to technology. There is still room for improvement in the United States, however, for uniform laws and rules that provide consistent government support, and protect property rights.
  
  
• The ability to manage a company is also needed in addition to the technology. It is important to respond with adaptability to current circumstances.
  
  
• The changes in the Japanese industrial structure over the past three years have changed the climate for venture capital.
  
  
• Japan lacks the incentive to invest. Education of entrepreneurs will play an important role as a policy for making investments sound.
  
  
• Venture capital is needed the most when a company is being founded. It is important to provide financial support in the initial stages of a startup.
  
  
• About two-thirds of the 6 billion yen foundation is composed of individual assets. About two-thirds of the investments go to companies with no sales that are not turning a profit. Also, most of the companies in which an investment is made have outside directors. Thus, the fund conducts hands-on investment.
  
  
• It has been said that it is impossible to procure funds from individual Japanese investors, but we have received support from many angels who understood the importance of a fund of individual investors, including people who started their own business.
  
  
• It is important to formulate one's own evaluation before proven results without being influenced by hearsay, and to discover corporations with the potential for growth in the future, such as our investment in North Corporation when it was unprofitable.
  
  
• There is a problem with indirect financing in Japan, including personal guarantees and credit squeezes. Therefore, angel investors have a large role in investment in Japan. The problem is that there is a limit in the amount of individual investment.
  
  
• I was involved with the development of printed circuit boards at Sony, and went independent at age 35. Most of the funds came from the roughly \100 million we saved from the consulting business and from investments from venture capitalists. There was a little amount of investment from banks. We did not receive any financial support from families.
  
  
• We built cooperative relationships with set makers and board makers, and received royalty income from patents and our expertise. We used intellectual property to expand our business.
  
  
• When starting the company, we used funds saved from consulting work on printed circuit boards from Sony. During the start-up period, we developed unique three-dimensional IC packaging technology that large companies had not developed. We did not receive sufficient financial support from banks during our growth period, so we expanded our business by procuring the required funds from the investments of venture capitalists and allocation of a third party.
  
  
• We were able to make it in business with the support of Sony due to our consulting service for Sony for five years after we were spun off, and with the understanding of Sony executives.
  
  
• We turned a profit in 2001. We offered our stocks to the public after favorable evaluations in South Korea and Japan.
  
  
• The climate for venture capital in Japan has been created over the past four or five years, which is about the same as in the United States. Also, laws were formulated about five years ago with the "Agreement for the Small and Medium Enterprise Venture Investment Limited Liability Cooperative Association". Three new markets were created, and there was a significant deregulation in standards for listing or public offerings. Japan has now become the country where it is the easiest to be listed on a stock exchange.
  
  
• Most of the venture capital in Japan comes from companies affiliated with banks and securities companies. They emphasize organization, vertical decision-making, and the salary-man ethos, and they are slow to assume risk.
  
  
• Unlike the U.S case, pension funds do not flow to venture capital funds. It is difficult for independent venture capital funds to rely on credit from the parent companies to procure funding, which hampers investment activities. In 2001, however, venture capital funds were created using the form of corporate-type investment trusts. This enabled individual investors to purchase shares in a venture capital fund in small lots of \100,000.
  
  
• Japanese small-medium sized companies borrow money from banks for most of their business activity funding. They provide individual guarantees, if a company fails, the company president also goes bankrupt, making it difficult to re-launch.
  
  
• Japanese banks employ real estate standard system and they maintain their focus on collateral. Venture capital-backed companies without assets find it difficult to borrow growth funds and operating funds for several years, until they make a profit, even if they could procure funds when they started up.
  
  
• The emphasis on the brands of large corporations is strongly rooted in Japan. It is difficult for venture capital-backed firms to conduct sales and marketing.
  
  
• Venture capital funds in the form of corporate investment trusts will spread in the future. If annuity funds also invest in venture capital funds, the venture capital market will expand to the \10 trillion level, equal to that of the United States.
  
  
• Fluidity of personnel is important. It has become easy to recruit personnel due to the bankruptcies of large corporations and other factors. I think venture capital-backed companies that have received financial support will grow over the next 10 years.
  
  
• Manufacturing companies are exchange listed more than 20 years after their founding, on average. If they can procure enough funding, it might be possible for them to have an IPO in about 10 to 15 years.
  
  
• We started our company with a little bit of savings and some pocket money that friends had squirreled away. The banks were in the midst of a credit crunch, and we were told that the company might not last a year, but we survived. Japanese have always been conservative, and remain that way.
  
  
• We were helped during our start-up by many of our customers in the United States. We would have been in trouble if our customers had been large Japanese companies.
  
  
• During the period of rapid growth (10 years after founding), when additional funds for R&D were required, we were helped a great deal by METI's subsidy for improving creative technology, the technology development subsidy system of NEDO and other research support systems such as local consortia. During the developmental growth period (15 years after founding), we received funding from venture capitalists and increased our capital. We began to think about an IPO. We floated stock after posting high growth rates over the next five years.
  
  
• The Japanese financial system provides payment by bills that require 10 months to collect the receivables. There are also many complicated aspects, such as acceptance inspections. In the United States, there is a down payment, 50% is paid in advance when the order is placed, and the remaining 10-20% is paid during the interim and at acceptance.
  
  
• It is important to educate entrepreneurs, to have a strong risk-taking spirit, and the freedom from being bound by anyone.

(Panel: Legal / Regulatory and Physical Infrastructure)

• In the United States business start-ups often choose the form of limited liability. Most of the partners and management team have limited liability. This is advantageous for fund managers and investors because of the flexibility.
  
  
• U.S. funds completely disclose their investment in venture capital-backed firms. Venture funds primarily invest in technological start-ups because they can make a high return on their investment in a short time. Also, they take a prudent investment approach with due diligence for companies several years after they have been in business. (This is difficult to do for new start-ups.) They also employ series preferred stock investment and warrants. When investing in technological companies, it is important to confirm patents and trademarks both in the United States and overseas, and to require confidentiality.
  
  
• A legal framework is required for annuity funds and for university funds. It is necessary to investigate what the impact of these frameworks will be.
  
  
• As a policy for cases where the company in which a fund has invested has gone bankrupt, there is a financial scheme for granting the same kind of right to the later investors as the one acquired by people who made initial investments, which is called a "cram-down".
  
  
• Exit strategies used by venture funds to recoup their investment include the sale of stock through IPOs, mergers, and redemption.
  
  
• The secret to success in start-ups is to be a hungry entrepreneur that takes risks and tries to accomplish a lot.
  
  
• Immigration laws that enable residency in the United States for intelligent people with a lot of ability have been very important. This has resulted in the admission of many excellent technicians from overseas.
  
  
• From the perspective of risk hedging, it is important to disperse investments to ensure sound investments. It is difficult to make a loss on investments in venture capital-backed companies if the investments have been diversified. There is the American saying, "don't put all your eggs in one basket"--in other words, diversify the risk. On the other hand, some think you should put all your eggs in one basket and watch the eggs very carefully.
  
  
• The problems facing IBM in the United States before seem to be the same problems facing Japan right now. Why is venture capital needed? The course traveled by IBM is insurance for us now.
  
  
• Now it is difficult to procure funds for companies backed by venture capital. It is also difficult to find the first customers. Big companies make mistakes, however, and overlook important issues. In comparison, venture capital-backed companies can provide better products and services due to the competition they face.
  
  
• The reason why investment is so difficult in Japan is the lack of corporate governance and low level of information disclosure.
  
  
• The most important reason that corporate governance has not become more important is that compensation of directors is not disclosed.
  
  
• Transaction agreements with banks require additional collateral. The right to establish collateral by financial institutions prevents the development of a bond market.
  
  
• The employment system makes it difficult to layoff employees. Because resources are not free, it is not easy to foster professional personnel.
  
  
• Japan is an island country. The educational system over many years has led people to believe that failure cannot be accepted or that failure is not good.
  
  
• Efforts pay off in the initial R&D stage, but it becomes difficult to make more money available for a prolonged period. The key during the R&D stage is how long and how cheaply it can be continued. No matter how passionate one is, how much continuity one has, this is not enough during the stage when you are not making money. Selling products requires larger organizations and greater fund support. In our case, we were lucky because we had financial support from JAFCO, who was our partner and provided us venture capital.
  
  
• In the process of moving from the basic stage to product development, we were lucky because we had Sumitomo Corp. and Nissha Printing Co. as partners who provided us with investment. This enabled us to form ties with large companies and conduct trials for technology.
  
  
• There are no borders for our markets. We established a presence in Europe four years ago and a presence in the United States three years ago. Five or six years after we started our company (in December 2001), we had an IPO and procured \2.2 billion. From the start, our idea was to assume the leadership in video archives in the global market.
  
  
• We believe that no matter how much we grow and how many new employees we take on, it is necessary to have a reshuffling of personnel. This promotes corporate innovation. We are promoting reforms to turn ourselves into a venture capital-backed company that always has the best person in the best position, and is careful about job distribution.
  
  
• The development of Mothers and other new markets was a good opportunity. This changed the manner in which venture capital was invested in Japan. There was an increase in independent venture capital replacing security company-affiliated capital and a trend towards hands-on-hands. Also, the Japan VC association was formed and gained further recognition.
  
  
• There are still problems with the taxation system and venture capital, however. The tax treatment is uncertain for the profits obtained by individual investors. The losses incurred when there has been a bankruptcy among one's investments cannot be counted. So the un-profitability for individual investors has to be eliminated. Fund accounting is not uniform and disclosure of the investment performance of funds has been insufficient.
  
  
• It might be a good idea to have a system for the capital for nurturing venture capital-backed firms.
  
  
• Japanese inevitably seem to view business startups in terms of a financial profit or loss. It is important to realize that starting a company is economically advantageous. Providing incentives in the taxation system would have a major impact on entrepreneurship.